On 25/9/2001 the Supreme Administrative Court delivered a ruling by which a corner stone of the basic principles of tax treaty interpretation was done away. Up to that point it had been uncontested that Article 7 of the OECD-MC in conjunction with Article 23 A required that not only business receipts but also business expenses related to a foreign permanent establishment (PE) had to be discarded from the domestic tax base. This was the case even if the expenses exceeded the receipts and if therefore losses occurred in the permanent establishment. Several times this concept had been confirmed by the Court itself as well as by the German Fiscal High Court. In its recent decision, however, the Court rejected that view and gave precedence to the principle that tax treaties cannot create taxing rights that are not available under domestic law. Under domestic law losses of foreign permanent establishments diminish the domestic tax base. According to the new ruling a tax treaty cannot be interpreted in such a way that it increases the tax base by denying such deductibility of the foreign losses. However, in order to avoid double deduction of losses (in the first year in the country of res...